ESG: an Acronym for Measuring Value

by Judith A. McGee

More people are asking values-based questions before investing their money. They ask about diversity, sustainability, corporate management, and environmental policies.  It is not uncommon to hear, “XYZ Corporation engages in practices that are harmful to the environment, so I don’t want their stocks in my portfolio.” Or, “I don’t want to invest in anything related to fossil fuels, or in a company that doesn’t treat their employees fairly.” 

It’s not unusual in progressive Portland, Oregon to hear such conversations.  Corporate leaders and entrepreneurs are listening and taking note of an emerging movement—one in which individuals purposefully seek out companies with strong Environmental, Social, and Governance policies (ESG). Smart money management is now defined as “those who seek to match their investment dollars to their personal values.” This has led an increasing number of companies to adopt a more structured approach to ESG because, simply put, it just makes good business sense. 

There is a building consensus that corporations who take care of their people and the environment will simply do better over time.  It’s a movement largely driven, not only by Boomers, but also by younger generations.  In fact, Gen Y first coined the phrase,  “Our values define us.”  

ESG.  What exactly does that mean?  Here is a simple breakdown to help you do your research:

Environmental: This refers to a company’s energy use, pollution, natural resource conservation, and animal treatment. It considers how environmental risks might affect a company’s income and how the company manages those risks. Think BP, or certain fracking activities that are raising environmental concerns. What is a company’s track record for disposing of hazardous waste, how do they handle toxic emissions, are they in compliance with government environmental regulations?

Social:  When researching a business’s relationships, note if they work with suppliers that hold the same values as the business claims to hold. Do they donate a portion of profits to the community or get involved with volunteerism? Are the working conditions healthy and safe for employees? Does the company consider stakeholders’ interests?

Governance: Does the businesses demonstrate accurate and transparent accounting methods, and allow common stock holders a vote on important issues? There should be no conflicts of interest when choosing board members, and it goes without saying that if companies are involved in any illegal activities or have made political contributions that directly benefit their own business, they are automatically eliminated from the viable investment list.

Here is another acronym to understand: MGM – or Market Governance Mechanisms.These are formal or informal rules that have been specifically designed to change the behavior of various economic decision-makers – including individuals, businesses, organizations and governments – and to encourage sustainable development. If one travels to places like India or China, it becomes evident that there really are no “local problems,” whether financial, environmental, or societal. We live in a global community.  

So the big question is, “If ESG investing becomes more of a mainstream movement will it encourage more MGMs?”Just being able to raise such a question bodes well for the future of business, the economy, and the planet. 

Sir Richard Branson, founder of The Virgin Group, is a big proponent for these ideals. A consummate optimist and self-made billionaire, Branson believes that a “clean revolution” is not a choice between saving our planet and growing our businesses. Such concepts are not mutually exclusive. “I think they just need to change their way of thinking about running their businesses—make them a force for good, not just a force to make money,” Branson said. “If they think like that and they empower all their staff to think like that, they can make a massive difference.”

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recomandation. Any opinions are those of Judith A. McGee and not necessaruly those of Raymond James.